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Tuesday February 27th, 2024

Sri Lanka budget revenues surge 38-pct to Sept 22 as economy inflates

ECON0MYNEXT – Sri Lanka state revenues surged 38 percent from a year earlier to 1,448 billion rupees in the eight months to September 2022, Finance Ministry data showed as the economy inflated in the wake of a currency collapse after two years of money printing.

Tax revenues surged 35 percent to 1,283 billion rupees amid tax hikes and high inflation even as the real economy contracted as attempts were made to stop the currency crisis, in familiar repeated phenomenon seen in countries with soft-pegged central banks.

The government has also hiked taxes, bringing in more revenue.

As a share of GDP tax revenues were still at 5.4 percent down from 5.7 percent as the economy was estimated to inflate to at least 23.8 trillion rupees in 2022 from 16.8 trillion rupees.

Current spending rose 20 percent from a year earlier to 1,571 billion rupees driven mainly by rising interest costs.

Soft-Pegging

High and volatile interest costs are also a familiar feature of countries with soft-pegged (intermediate regime) central banks which generate monetary instability.

Interest costs rose to 927.4 billion rupees from 833.0 billion rupees as breaks were put on the currency crisis amid a deficit.

Current spending was down to 6.1 percent of GDP from 6.3 percent a year earlier as the economy inflated, a phenomenon where budget and debt become manageable as debt is inflated away known as high inflation and financial repression.

Sri Lanka’s inflation hit 70 percent in the third quarter but interest rates were only around 30 percent.

Classical economists and analysts have called for a currency board to be set up so that money cannot be printed by interventionists (post-Keynesians or Mercantilists) to create currency crises which are then followed by output shocks and high interest rates.

Sri Lanka saw heightened monetary instability in the wake of ‘flexible’ inflation targeting, perhaps the most deadly dual anchor conflicting soft-pegging regime ever peddled to hapless developing nations without a doctrinal foundation in sound money, according to critics.

The framework which helped drive a country at peace into default with surging ‘cover up loans’ as forex shortages made in difficult to repay foreign debt (a phenomenon known as the transfer problem) is to be legalized under a deal with the International Monetary Fund.

Policy makers in such countries – characterized by Latin America – have both ‘fear of floating’ and currency board phobia preventing the operation of a consistent single anchor monetary regime with low interest rates and external stability.

Such countries have long term low growth as about 18 months in a four year credit cycle is spent recovering from the previous currency crisis from ‘flexible’ and ‘data driven’ policy.

The lags in inflation allowed Sri Lanka central bank to suppress rates with money printing and bombard the exchange rate peg until it collapses, creating currency crises in 2015/16, 2018 and in 2020/2022.

Deficits down

The current account or revenue deficit of the budget, or the gap between total revenues and current spending was 851.7 billion rupees, down 18 percent from 1,036 billion rupees.

As share of GDP the current account deficit was down to 3.6 percent of GDP from 6.2 percent.

Capital spending was up 35 percent to 395.6 billion rupees up to September. However as a share of GDP it remained at 1.7 percent as the economy inflated.

The overall deficit was 1,244 billion rupees down 6 percent from a year earlier. As a share of the inflated economy, the deficit was down to 5.2 percent from 7.9 percent a year earlier.

The primary deficit, which is the deficit before interest costs fell to 317.06 billion rupees up to September down from 495.25 a year earlier.

The IMF usually targets a primary deficit because interest costs tend to rise as a currency crisis triggered by the soft-pegged central bank is halted.

Up to September 2022, 1,217 billion rupees were printed (classified as central bank credit to government), up from 665.5 billion rupees last year, compared to a deficit of only 1,244 billion rupees.

It is as if no private sector or EPF money was used to finance the deficit.

Critics have said that Sri Lanka’s central bank usually monetizes not the annual deficit, but the gross domestic finance requirement (maturing bills from past deficits) due to an obsession with controlling Treasuries yields, and the action is then blamed on the ‘budget deficit’.

In 2022 Sri Lanka’s central bank repaid state foreign loans, and also sterilized interventions after using deferred payments on Asian Clearing Union dues from India.

Offsetting reserves sold for imports is effectively private sector financing, but due to the use of Treasury bills for the activity, the practice is also blamed on ‘budget deficits’.

(Colombo/Nov18/2022 – Corrected – data to September not August 2022)

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Sri Lanka halts banks’ parate execution powers

ECONOMYNEXT – Sri Lanka will suspend the procedure for banks to acquire properties used as a collateral in the event the loans are not paid off, until December this year.

“Various parties have pointed out issues existing in paying off the loans obtained by small and medium scale businessmen from banks,” Cabinet spokesman minister Bandula Gunawardena said Tuesday.

“Therefore, it is apparent that a sufficient grace period to pay off relevant debts without being a burden to the banking system should be allowed.”

“Accordingly, the Cabinet of Ministers granted approval to the proposal furnished by the President in his capacity as the Minister of Finance, Economic Stabılızation and National Policies to suspend the procedure by the banks to acquire properties of loans not paid off, until 15 December 2024, and to amend Section 4 of the Recovery of Loans by Banks (Special Provisions) Act No, 4 of 1990 to impose legal provisions required for the above.” (Colombo/Feb27/2024)

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Sri Lanka parliamentary committee says electricity tariffs should be reduced by 20 pct

ECONOMYNEXT — A parliamentary Sectoral Oversight Committee on Alleviating the Impact of the Economic Crisis has recommended to the Public Utilities Commission of Sri Lanka (PUCSL) that electricity tariffs be reduced by at least 20 percent.

A statement from parliament said on Monday February 26 that, following an analytical review of the figures presented by the Electricity Board, Public Utilities Commission, etc. and taking into consideration all other factors affecting the price of electricity, including considering the opinion given by experts that the existing electricity price can be reduced by about 33%, price of electricity should be reduced by at least 20% in the year 2024 so that the state-run Ceylon Electricity Board (CEB) will not suffer any loss.

PUCSL officials have informed the Committee that by the end of this month, they can submit the necessary recommendations to reduce the electricity bill, according to the statement.

The matter was taken up for discussion when the committee, chaired by MP Gamini Waleboda, met in the Parliament on February 22.

Officials from the Ministry of Industry, Ministry of Finance, Central Bank of Sri Lanka, Public Utilities Commission, Industry Development Board, Enterprise Development Authority, Department of Population and Statistics, Department of Inland Revenue and from government institutions including the Micro, Small and Medium Scale Industries Board and a group of industrialists had also been called for the meeting.

“The Committee gave several directives to the relevant institutions and officials to identify the micro, small and medium scale industries that are directly affected by the economic crisis and to activate the local economy and increase the foreign exchange earnings by reviving the industry sector.

“The Committee pointed out that due to the increase in electricity bills, the number of electricity connection cuts reported across the island has exceeded one million. It was also emphasised that in order to alleviate the pressure on the industry and the society, it should be arranged to provide electricity connections again by charging only 50 percent of the outstanding charges at the initial stage with the concessional basis of payment of outstanding electricity charges on installment basis,” the statement said.

The committee was also of the view to allow the customer to pay the connection fee in installments so as to avoid discouraging new entrepreneurs to start micro, small and financial industries due to high charges for getting fixed electricity connection and instructed to review the new connection fee and work to reduce it as much as possible.

The committee chair has instructed the PUCSL to conduct an audit on the electricity consumption in the public sector as an approach to ensure energy security.

“The Committee recommended to the Ministry of Finance and the Central Bank to start a loan scheme at subsidised interest for the purchase of solar panel systems with a view to promoting solar energy as a source of energy supply to industries. The Ministry of Finance expressed its agreement to provide refinancing facilities subject to a maximum as per the proposal made by the Committee to implement a loan scheme targeting micro, small and medium scale industrialists under subsidized interest rates.

The committee has also recommended that raw materials that must be imported from abroad and impose tax concessions on such raw materials be identified to ensure the supply of raw materials required for the smooth running of micro, small and medium scale industries. Copper, lead, aluminum and other industrial scraps used as raw materials in various domestic industries currently being sold by the CEB to external buyers and other entities should also be issued to micro, small and medium scale industrialists recommended by the Ministry of Industry and the Industrial Development Board, the committee has recommended.

The definition used by the Department of Population and Statistics for micro, small and medium industries and the definition used by other institutions such as the Industrial Development Board and the Central Bank for those industries are different from each other, which is an obstacle in making policy decisions, the committee had noted, directing the Department of Population and Statistics to support to the policymakers by releasing statistical data based on a common definition.

“The committee also recommended that the Credit Information Bureau should take prompt action to remove their credit information from the blacklists so as to facilitate access to credit facilities for micro, small and medium scale industries facing financial crisis to activate their balance sheets and to review all existing laws and procedures for registration of micro, small and medium scale industries as well as to obtain licenses and introduce a simple system.

“The committee informed all the parties to establish a steering Committee headed by the Ministry of Industry to implement the recommendations given by the Committee and to report its progress within a week,” the statement said. (Colombo/Feb27/2024)

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Sri Lanka sets up fund to help children of Gaza

The United Nations Relief and Works Agency for Palestine Refugees in the Near East is mandated to provide education, health, relief and social services, and emergency assistance to refugees. (Pic courtesy UNWRA)

ECONOMYNEXT – Sri Lanka’s cabinet of ministers have approved a proposal by President Ranil Wickremesinghe to set up a fund to help children caught in the war in Gaza, a statement said.

The government will contribute a million US dollars and use funds allocated by state agencies for Ifthar celebrations.

Public contributions are also called.

The Presidential Secretariat is requesting public donations citizens for the “Children of Gaza Fund” to be contributed to account number 7040016 at Bank of Ceylon (7010), Taprobane Branch (747) by 11th April.

Deposit receipts should to be forwarded to 0779730396 via WhatsApp. (Colombo/Feb27/2024)

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